FINAL EXAM
just in time
a method of managing purchases so the materials or goods are delivered just as needed for production or sale
regression analysis
a statistical method that measures the average amount of change in the dependent variable associated with a unit change in one or more independent variables
equals, exceeds
for the IRR method, a project is accepted only if the IRR ________ or ________ the required rate of return
unfavorable variance
has the effect of decreasing operating income relative to the budget amount
favorable variance
has the effect of increasing operating income relative to the budget amount
true
high level of activity may not coincide with high level of cost and vice versa
capacity analysis
if a company uses absorption costing, ___________ affects the amount of fixed overhead that is assigned to inventory
methods to estimate cost behavior
industrial engineering method, conference method, account analysis method, quantitative methods: High-low method, regression
relevant range
is a level of volume or activity within which a company is expected to operate.
static (master) budget
is based on the output planned at the start of the budget period
opportunity cost
it is calculated as the required rate of return multiplied by the per unit costs of acquiring inventory, such as the purchase price of units, incoming freight, and incoming inspection
false
managers should always buy inventory in quantities that result in the lowest purchase cost per unit
false
managers will always choose the alternative that maximizes operating income or minimizes costs in the decision model
y=a+bX
mixed cost linear function
depreciation
not included in relevant cost analysis except when considering tax implications
false
one advantage of the NPV model is that it will always provide an unbiased estimate of whether or not the proposed capital investment will earn the required rate of return
false
one drawback to discounted cash flow capital budgeting models such as NPV and IRR methods is that they ignore depreciation
false
only quantitative outcomes are relevant in capital budgeting analysis
master-budget capacity
output expected to be produced over the next year
theoretical capacity
output if producing all of the time and everything goes perfectly
practical capacity
output if producing all of the time except for unavoidable interruptions
relevant ordering costs per purchase order
p in the EOQ equation
insourcing
producing goods or services within an organization
true
project proponents often tend to put the "best face" on project proposals and lose objectivity
outsourcing
purchasing goods or services from outside vendors
high low, regression
quantitative methods to estimate the cost behavior
confidence interval
range around the regression coefficient within which the user can be confident that the predicted cost will fall.
project initiation, project operation, project disposal
relevant cash flow for capital expenditures
time value of money
relevant when deciding among alternatives with cash flows over two or more years
p-value
risk that the X (cost driver) and Y (cost) are unrelated
decision rule
select the option that will provide the firm with the lowest cost, and therefore the highest profit
flexible budget
shifts budgeted revenues and costs up and down based on actual operating results (activities)
third step of NPV method
sum the present value figures to determine the NPV. Positive or zero NPV signals acceptance, negative NPV signals rejection
true
the EOQ formula results in the quantity that minimizes annual relevant total costs
sensitivity analysis
"what if" technique that is applied to each of the inputs to the capital budgeting decision. Adjust cash inflows and outflows by a certain percentage and calculate NPV for each possibility
sunk cost
a cost that has been incurred in the past or committed for the future (describes a lot of fixed costs)
relevant cost
a future cost that differs between the decision alternatives
project operation
- cash operating expenses, net of tax - additional net working capital requirements - operating cash inflows, net of tax
project disposal
- net of tax investment disposal - recapture of investment in net working capital
scenario analysis
- possible capital budgeting input values based on specific scenarios - steady state scenario, optimistic scenario - disappointing scenario, disaster scenario
capital budgeting decisions
- purchases of equipment, buildings - acquisitions & scale of divisions or companies - launching a new product
project initiation
- required investment outlays, including installation costs - includes incremental net working capital commitments
nonlinear cost functions
1. economies of scale 2. quantity discounts 3. Step cost functions-resources increase in "lot-sizes", not individual units 4. Learning curves-labor hours consumed decrease as workers learn their jobs and become better at them 5. Experience curve-broader application of learning curve that includes activities such as marketing and distribution
b
A basic assumption of activity based costing is that: A. All manufacturing costs vary directly with units of production B. Products or services require the performance of activities, and activities consume resources C. Only costs that respond to unit-level drivers are product costs D. Only variable costs are included in activity cost pools
A
Ace Cleaning Service is considering expanding into one or more new market areas. Which costs are relevant to Ace's decision on whether to expand? Sunk Costs, Variable Costs, Opportunity Costs A) No, yes, yes B) Yes, Yes, Yes C) No, Yes, No D) Yes, No, Yes
42,857.14 , 15,000,000, 63,265.31
Assume Apple has forecast the following information for its new Apple HomePod. Price per HomePod $350 Variable cost per HomePod $105 Fixed costs related to HomePod production $10,500,000 What is the breakeven point(both in units and revenue) and how many homepods would they need to sell to make a target profit of 5,000,000?
breakeven point
Breakeven point is the point at which total revenues equals total costs
2,000 U
Budgeted fixed OH rate = $15 per pound. Budgeted usage of direct material per doorknob = .3 pound. Budgeted annual production = 400,000 doorknobs Actual production for the month = 35,000 doorknobs. Actual usage of direct materials for the month = 10,450 pounds. Actual fixed OH for the month= $152,000. DDC's fixed manufacturing overhead spending variance for the month was:
7,500 F
Budgeted fixed OH rate = $15 per pound. Budgeted usage of direct material per doorknob = .3 pound. Budgeted annual production = 400,000 doorknobs Actual production for the month = 35,000 doorknobs. Actual usage of direct materials for the month = 10,450 pounds. Actual fixed OH for the month= $152,000. DDC's production volume variance for the month was:
300 F
Budgeted variable OH rate = $6 per pound. Budgeted usage of direct material per doorknob = .3 pound. Budgeted annual production = 400,000 doorknobs Actual production for the month = 35,000 doorknobs. Actual usage of direct materials for the month = 10,450 pounds. Actual variable OH for the month= $64,150. DDC's variable manufacturing overhead efficiency variance for the month was:
1,450 U
Budgeted variable OH rate = $6 per pound. Budgeted usage of direct material per doorknob = .3 pound. Budgeted annual production = 400,000 doorknobs Actual production for the month = 35,000 doorknobs. Actual usage of direct materials for the month = 10,450 pounds. Actual variable OH for the month= $64,150. DDC's variable manufacturing overhead spending variance for the month was:
demand pull, lean production
JIT production is a ________ approach and is also called __________ production
D
Chade Corp. is considering a special order brought to it by a new client. If Chade determines the variable cost to be $9 per unit, and the contribution margin of the next best alternative of the facility to be $5 per unit, then if Chade has: A) Full capacity, the company will be profitable at $4 per unit. B) Excess capacity, the company will be profitable at $6 per unit. C) Full capacity, the selling price must be greater than $5 per unit. D) Excess capacity, the selling price must be greater than $9 per unit.
demand in units for specified period
D in the EOQ equation
negotiated transfer pricing
Division managers or their representatives actually negotiate the price at which transfers will be made.
full costing transfer pricing
Easy implementation / appropriate for taxes Problem is that fixed cost irrelevant for decisions (at least in the short-term) Full cost with markup - without a market price, no incentive to lower costs for supplier division
variable costing transfer prices
Encourage correct decision making Selling unit will show a loss (because of any fixed costs)
true
JIT purchasing is not guided solely by the EOQ model because that model only emphasizes the tradeoff between relevant carrying and ordering costs
68,367
How many units are needed to meet target $5,000,000 AT profit assuming 20% tax rate (and Fixed Costs of $10,500,000)?
C
Lees Corp. is deciding whether to keep or drop a small segment of its business. Key information regarding the segment includes: Contribution margin: 35,000 Avoidable fixed costs: 30,000 Unavoidable fixed costs: 25,000 Given the information above, Lees should: A) Drop the segment because the contribution margin is less than total fixed costs. B) Drop the segment because avoidable fixed costs exceed unavoidable fixed costs. C) Keep the segment because the contribution margin exceeds avoidable fixed costs. D) Keep the segment because the contribution margin exceeds unavoidable fixed costs.
1. Production beyond demand will increase the amount of inventory on hand 2. This will result in more fixed costs being capitalized as inventory 3. That will leave a smaller amount of fixed costs to be expensed during the period 4. Profit increases, and potentially so does a manager's bonus
Managers may seek to manipulate income by producing too many units
b
Multiple or departmental manufacturing overhead rates are considered preferable to a single or plantwide overhead rate when: A. Manufacturing is limited to a single product flowing through identical departments in a fixed sequence B. Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques C. Individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships D. The single or plantwide rate is related to several identified cost drivers
a
Nick's Enterprises has purchased a new machine tool that will allow the company to improve the efficiency of its operations. On an annual basis, the machine will produce 20,000 units with an expected selling price of $10, prime costs of $6 per unit, and a fixed cost allocation of $3 per unit. Annual depreciation on the machine is $12,000, and the tax rate of the company is 25%. What is the annual cash flow generated from the new machine? A) $63,000 B) $51,000 C) $18,000 D) $6,000
absorption costing
a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included in inventory
15, 82500
Overhead is allocated on the basis of direct labor hours Budgeted OH = $75,000 Budgeted DLH per unit = 5 1,000 units were budgeted, 1,100 units were actually made Actual DLH = 5,400 What is the Budgeted OH rate? Standard Costing - What is the amount of allocated OH?
all, two
Regression analysis is more accurate than the high low method because the regression equation estimates costs using information from _______ observations; the high low method uses only _________ observations
Variable Costing
a method of inventory costing in which only variable manufacturing costs are included in inventory
b
The following information pertains to the transaction replacing a print machine for Hidden Creek Enterprises, Inc. Net book value - old print machine $20,000 Total cost of new machine $180,000 Down payment on new machine $35,000 Sale price of old machine $30,000 Tax rate 30% What is the net total of relevant costs? A) $173,000 B) $153,000 C) $28,000 D) $8,000
y=a+bX
The linear cost function
operating leverage
This measures the extent to which companies have fixed costs in their cost structure Illustrates risk-return tradeoff 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛/𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
market based transfer prices
Use the price of a similar product or service that is publicly available. Sources of prices include trade associations, competitors, etc.
D
Which of the following is not a qualitative factor that Atlas Manufacturing should consider when deciding whether to buy or make a part used in manufacturing their product? A) Quality of the outside producer's product. B) Potential loss of trade secrets. C) Manufacturing deadlines and special orders. D) Variable cost per unit of the product.
a
Which of the following statements is true if the NPV of a project is -$4,000 (negative $4,000) and the required rate of return is 5 percent? A) The project's IRR is less than 5 percent. B) The required rate of return is lower than the IRR. C) The NPV assumes cash flows are reinvested at the IRR. D) The NPV would be positive if the IRR was equal to 5 percent.
materials requirements planning
a "push through" system that manufacturers finished goods for inventory on the basis of demand forecasts
false
a branch office or business segment that shows negative operating income should be shut down
false
a component part should be purchased whenever the purchase price is less than its total manufacturing cost per unit
sunk cost
a cost that has already been committed and cannot be recovered
zero
accept the project if the NPV is greater than or equal to _______
false
all future costs are relevant
false
all overhead costs are relevant in discounted cash flow capital budgeting models
positive
all projects with _________ NPV would add value to the corporation
normal capacity
average output expected to be produced over a 2 to 3 year period
time value of money
both NPV and IRR are decision models that explicitly incorporate the ________________
relevant carrying costs of one unit in stock for the time period used for D
c in the EOQ equation
IRR method
calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of its expected cash outflows
true
control and monitoring is critical to keeping a project on budget and profitable
second step of NPV method
convert the inflows and outflows into present value figures using the required rate of return (with tables or a calculator)
true
cost written off as depreciation on equipment already purchased is always irrelevant
first step of NPV method
draw a sketch of the relevant cash inflows and outflows
y=a+0X
fixed cost linear function
opportunity costs
the benefit lost when one chosen option precludes the benefits from an alternative option, should also be considered in the analysis of alternative options
true
the high low method only utilizes two data points
time period issue
the payback to a decision may not be in the current period
capital budgeting
the process of identifying, evaluation, selecting, and controlling capital (long-term) investments
adjusted r-squared
the proportion of the variability in Y (cost being predicted) that is explained by X (cost driver)
relevant opportunity cost of capital
the return foregone by investing capital in inventory rather than elsewhere.
true
the three categories of cash flows typically used in discounted cash flow models such as NPV are cash flows at initiation, operating cash flows and cash flows at disposal
simple
type of regression that estimates the relationship between the dependent variable and one independent variable
multiple
type of regression that estimates the relationship between the dependent variable and two or more independent variables
true
unusually high or low levels of activity (outliers) may produce inaccurate results
standard costing
uses standard (budgeted) rates for direct materials, direct labor and overhead
y=0+bX
variable cost linear function
false
variable costs are always relevant, and fixed costs are always irrelevant
selling price - disposal costs
what is net proceeds equal to?
how fixed manufacturing costs are accounted for
what is the difference between absorption and variable costing
fixed overhead
what is the only cost that changes classifications between the two methods of absorption costing and variable costing
higher, lower
when production < sales operating income for variable costing is __________, and operating income for absorption costing is ___________.
lower, higher
when production > sales operating income for variable costing is ___________, and operating income for absorption costing is _____________.
